HCL Technologies 4QFY2014 performance highlights and results update

HCL Technologies (HCL Tech)’ numbers for 4QFY2014 came in better than expected on the OPM and net profit front, while the top-line came in just in line with our expectation. The company posted a revenue of US$1,407mn for the quarter, up 3.4% qoq. The EBITDA margin came in at 26.3% (V/s an expected 25.9%), ie a decline of ~43bp qoq, mainly on back of higher manpower costs. Utilization level stood at 84.5% V/s 84.2% in 3QFY2014. This led the net profit to come in at Rs.1,834cr (V/s an expected Rs.1,629cr), up 12.9% qoq, on back of lower taxation during the quarter. We maintain our Buy rating on the stock with a target price of Rs.1,859.

Quarterly highlights: The company posted a revenue of US$1,407mn for the quarter, up 3.4% qoq, and in line with our expectation. In Constant Currency (CC) terms, the company posted a 2.8% qoq growth in sales. The growth came on back of Europe, which grew by 6.5% qoq (CC), while USA and ROW grew by 1.3% qoq (CC) and by 0.1% qoq (CC), respectively. In terms of services, business services grew by 16.8% qoq (CC); and in terms of industry, telecommunications, media, publishing & entertainment grew by 9.5% qoq (CC) while financial services grew by 8.2% qoq (CC). The EBITDA margin came in at 26.3% (V/s an expected 25.9%), ie a decline of ~43bp qoq, mainly on back of higher manpower costs. The utilization level of the company stood at 84.5% V/s 84.2% in 3QFY2014. This led the net profit to come in at Rs.1,834cr (V/s an expected Rs.1,629cr), up 12.9% qoq, on back of lower taxation during the quarter. The tax rate for the quarter stood at 16.1% of PBT V/s 19.5% during the corresponding quarter of last year.

Outlook and valuation: We expect HCL Tech to post a USD and INR revenue CAGR of 13.7% and 12.3%, respectively, over FY2014–16E. We remain watchful of the company’s performance in the core software services segment. On the operating front, we remain skeptic on the company’s ability to sustain operating margins at current levels. This is on account of the ongoing hiring in the company to align staff strength to service the growing business and on account of the company estimated to hike wages going forward to restrain attrition. We recommend a Buy rating on the stock.